AAR Corp (AIR): Unlocking Value Through Operational Precision and Digital Innovation

AAR Corp (NASDAQ: AIR) is emerging as a standout player in the aerospace and defense sector, driven by a strategic blend of operational cost discipline and high-growth digital initiatives. Recent financial results underscore a compelling narrative: margin expansion is accelerating, and the company's focus on portfolio optimization—coupled with the scalability of its Trax software—positions it to capitalize on long-term industry tailwinds. For investors, the question is no longer whether AAR is turning a corner, but whether its valuation reflects its full potential.

The Margin Turnaround: Closing Facilities, Opening Doors to Profitability

AAR's fiscal 2025 performance marked a decisive shift toward higher profitability. Adjusted EBITDA margins rose to 12.4% in Q4 2025, up from 11.6% a year earlier, fueled by strategic divestitures, facility closures, and synergies from acquisitions. The most notable moves include:
- Landing Gear Overhaul Divestiture: The $48 million sale of this low-margin business in late 2025 removed a drag on profitability and redirected resources toward higher-margin segments like parts distribution and software.
- New York Facility Closure: While the final phase of closing its underperforming New York repair facility temporarily pressured Q4 margins, the removal of “stranded fixed costs” will free up capital and improve segment profitability starting in Q1 2026.

The completion of these initiatives sets the stage for further margin gains. Management now targets mid-teens adjusted EBITDA margins by 得罪2026, driven by:
1. Oklahoma City and Miami Hangar Expansions: Both facilities, now fully operational, are already under contract to handle high-margin heavy maintenance work. Their capacity utilization will reduce outsourcing costs and boost margins.
2. Portfolio Shift: AAR's focus on parts supply (up 20% organically in 2025) and government contracts (bolstered by Trax's role in defense logistics) ensures a healthier sales mix.

Trax Software: The Digital Catalyst for Sustained Growth

While operational efficiency is critical, AAR's most transformative asset is its Trax software, a cloud-based platform modernizing aviation maintenance, repair, and overhaul (MRO). The July 2025 announcement of Trax's $15.5 million deal with Delta TechOps—a partnership to digitize maintenance workflows for 6,000+ technicians—is a game-changer. This win:
- Validates Scalability: Trax's modular, cloud-based architecture can now support one of the world's largest airlines, proving its ability to handle diverse fleets and global operations.
- Boosts Recurring Revenue: Software licenses and upgrades provide predictable cash flows, reducing reliance on cyclical MRO services.

Trax's contribution to margins is clear: its contracts in 2025—such as the U.S. Navy pilot training deal and SIA Engineering's Malaysia expansion—helped Parts Supply margins expand by over 200 basis points. As Trax's customer base grows, its software-as-a-service (SaaS) model will further insulate AAR from industry volatility.

The 2026 Roadmap: Margins, Leverage, and Market Share

Management's confidence in 2026 stems from three pillars:
1. Margin Expansion: The removal of legacy costs (New York closure), synergies from the Product Support acquisition, and Trax's scalability target a +100 bps margin improvement this year.
2. Debt Reduction: Net leverage fell to 2.72x in 2025, and free cash flow is expected to fund further deleveraging. Lower debt will reduce interest costs and free up capital for growth.
3. Market Share Gains: Trax's Delta deal is just the start. With $1.3 billion in contract wins in 2025, AAR is poised to capture $5 billion+ in addressable software markets by 2027.

Investment Thesis: Buy Before the Market Catches On

AAR trades at 10.2x 2026E EBITDA, a discount to peers like Parker Hannifin (PH) (14x) and Spirit AeroSystems (SPR) (12x). This undervaluation ignores the company's margin trajectory and Trax's growth potential. Key catalysts ahead include:
- Q1 2026 Earnings: The removal of New York's costs should lift margins immediately.
- Trax Upsells: Existing customers (e.g., Delta) will likely adopt additional modules, boosting software revenue.
- Defense Pipeline: The $500+ million DLA Supply Chain Alliance contract is a springboard for further government wins.

Risks: Near-term cash pressure (due to seasonal factors) and execution risks in software rollouts could weigh on sentiment. However, AAR's balance sheet (cash of $180 million) and diversified customer base mitigate these risks.

Verdict: Buy AAR Corp Ahead of Margin Inflection

AAR's combination of operational rigor and digital innovation creates a compelling moat. With a clear path to mid-teens margins and Trax's software poised to dominate MRO digitization, this stock offers asymmetric upside. Investors should act now—valuation remains low, and the market has yet to fully price in AAR's transformation.

Rating: Buy
Price Target: $65 (20% upside from current levels)